"But the levee was dry.": Levy on US-China relations

Excellent take on US-China relations.

What is interesting is how quickly China can threaten to go "over the top". The US needs to get used to not being able to call the shots in China. The implications of the enormous US paper holdings that China owns are yet to be fully understood.

The US fear of China is equally over the top with China bashing a favourite sport among the US press. This irrationality needs to be curbed - US trade economists are trying but finding it hard to be heard.

This quote sums up the difficult Chinese position:

The cheap yuan policy is now threatening the Chinese economy with overheating and inflation. Yet the Chinese hold back for fear of economic turmoil and financial sector distress.

It is refreshing to read someone talking sense for once. This following quote is undoubtedly true.

If China were to recede as an exporter into the U.S. market, Asian neighbors would largely fill China’s spot. This is also why Chinese currency revaluation would do relatively little for American manufacturing employment. China may be the cheapest producer of imported manufactures, but it’s not the only producer. And much of the American job loss in manufacturing is traceable to technological change rather than imports.

Hopefully common sense will eventually prevail and congress with begin to see the wood for the trees.

My bold.

Eat the Fish—Or Else! from The American.

Perhaps it’s just the stupefying heat of August, but U.S.-Chinese economic relations are devolving into confusion. Last week, American authorities identified another shipment of tainted seafood from China. Then there were reports of Chinese threats to dump their holdings of American bonds—the so-called “nuclear option”—in response to American trade protection. This caused at least one news outlet to draw a causal link. Selling $400 billion in bonds would certainly be an escalation over the standard response to a failure to clean your plate.

In fact, it is not only casual observers who are getting entangled in the burgeoning conflicts between the countries. Chinese media and officials have also conflated two disputes that really ought to be kept separate—Congressional outrage over China’s undervalued currency and public concern about the safety of Chinese products.

The misguided nature of Congress’ currency crusade could be responsible for the mess. The Chinese may have concluded that America’s obsession with the bilateral trade deficit is causing Americans to question the purity of their produce. Alarmed by the deficit and the decline in manufacturing employment, Congress has been demanding an appreciation of the Chinese currency for years. Such a move would make American goods look cheaper to Chinese and would make Chinese goods appear more expensive to Americans.

Oddly enough, pretty much everyone agrees this would be the right thing for China to do. China, a relatively poor country, has been lending hundreds of billions of dollars to the rest of the world as it has accumulated a $1.3 trillion mountain of international reserves. The cheap yuan policy is now threatening the Chinese economy with overheating and inflation. Yet the Chinese hold back for fear of economic turmoil and financial sector distress.

While a currency appreciation would help China, it would do relatively little for the United States. China is large enough that a revaluation could bring down the U.S. trade deficit a bit, particularly if the move prompted other Asian countries to let their currencies rise. But the U.S. trade deficit is spread across partners in Asia and the Middle East. If China were to recede as an exporter into the U.S. market, Asian neighbors would largely fill China’s spot. This is also why Chinese currency revaluation would do relatively little for American manufacturing employment. China may be the cheapest producer of imported manufactures, but it’s not the only producer. And much of the American job loss in manufacturing is traceable to technological change rather than imports.

Yet Congress remains obsessed. Bills have been blossoming across Capitol Hill threatening to adopt trade protection if the Chinese don’t move. Before last November’s election, these bills were suppressed through Republican Party discipline. Now they are enjoying bipartisan and possibly veto-proof support. If such measures are adopted, the likely outcome will be increased American tariffs on imported Chinese steel and other products.

This prospect has alarmed the Chinese sufficiently that last week they issued an unofficial warning. If America chooses to damage itself with tariffs, in effect, they threatened to retaliate with financial self-immolation in the form of a massive bond sale. It’s not immediately clear how China would go about doing this, but any approach has its problems. If they sold the bonds and took Chinese currency in return, this would cause the yuan to appreciate—just what Congress wants! If they simply exchanged dollar reserves for euro reserves, the question would be whether they manage to spook markets or not. If they don’t, then there’s little impact on the United States. If they do, they could drive up U.S. interest rates but the value of their massive hoard would crumble as the price of bonds plummets.

The simultaneity of this threat and the latest food safety warning was coincidental, but they are not unrelated. American public concerns about tainted toothpaste, carcinogenic catfish, and leaded toys are real. But in the heated atmosphere of current discussions, China has occasionally reacted as if this were just another sortie in the grand American crusade against the bilateral trade deficit. They have responded with statistics and counterclaims against U.S. food exports. Given the prevalence of flawed analysis in this debate, it has gotten hard for the Chinese to know when to take us seriously.

Congress is demanding the right policy for the wrong reasons and warning that they’ll hurt American consumers unless they get their way. Regular Americans are scared of the Sino-shrimp. And the Chinese are threatening to do what Congress wants, unless Congress relents. This has all the makings of a classic summer farce. If only global macroeconomic stability didn’t depend on it.